What is the Difference between proprietary firm and partnership firm?

Answer 1

Proprietary firms: The proprietary firm is the firm in which only one mortal is the owner, who is called as "proprietor". He is the direct mortal of profits & losses. He has the right to take the decisions individually. The following are the pros & cons: Advantages: Proprietary firms are the most easiest & economical form of business to form and operate. The proprietor can be act as Manager and he has right of freedom to take decisions. This is very suitable where the size of business is small and. A proprietary firm does not require submitting more number of documents to the government. Disadvantages: A proprietary firm does not have any legal status. The proprietor might not be capable to invest further, when the business is in downfall or complex stages. These are unlimited liability firms & the proprietor's property will always be at stake, if the liability is more than assets. The proprietor needs to pay higher taxes, as he is the direct person, who is enjoying the profits. Transferring of business is not easy. Partnership firms: The firm, in which the partners are more than 2 and less than 20 with an official written down document called "Partnership deed" or "Partnership agreement" is called as partnershipfirm. It is a contract and relationship between the partners. They will decide the percentage of investment, profit share and will also include the same in the agreement. The advantages and disadvantages are: Advantages: Partnership firms are simple and economical to operate and form. As the numbers of partners are more, the capacity of the business to handle more complex business is better, when compared to proprietary firms. The tax structure is at a flat rate of 35% and the following are the assumptions, while calculating the tax: a) Interest paid to partners on the amount invested in the company. But the rate of interest should not exceed 12% per annum. b) Remuneration paid to the partners in the form of salary, bonus, commission etc. However, the partners should be working partners, i.e., the mortal who is involved in day-to-day activities. Section 44AA of Income tax Act, 1961 states that the remuneration paid is depended and decided on the basis of its "Book Profits". Also, the same differs from a professional firm to a business firm. Nominal government regulations. Disadvantages: The partnership firm does not have any legal status. The retirement or death of a partner leads to dissolution of the partnership firm. Decision making to improve the capacity of business or to raise funds is limited and time taking. Partnership firm is an unlimited liability organization. Incase of losses, all the partners are liable to clear off the debts. Transfer of ownership is not easy.